Crediting foreign withholding tax against German trade tax

Background to surplus tax credits

In the past, particularly after the cut in the rate for corporation tax to 15% due to the 2008 corporation tax reform legislation, in many cases, there have been so-called surplus tax credits. The main factor responsible for these surplus tax credits was that foreign withholding taxes are normally calculated on the basis of gross income, thus before the deduction of related expenses, while the domestic (German) amount that could be offset has to be determined on the basis of net figures. Another reason for surplus tax credits is the abolition, as of 2014, of the so-called corporation tax affiliation privilege. Accordingly, free-float dividends are generally subject to corporation tax and trade tax in Germany at the full rates. However, the fiscal authority considers that it is only possible to offset the tax credits for corporation tax purposes.

Contrary to the language used in the legislation, the FG has allowed offsetting

In the case in question, the Hesse tax court (Finanzgericht Hessen, FG) had to rule on an issue regarding the German DTA with Canada, with the particularity that, for corporation tax purposes, the German enterprise had generated a negative result, but a positive trading profit for trade tax purposes. Taking the relevant DTA into account, the ruling by the FG, of 26.8.2020 (case reference: 8 K 1860/16), stated that offsetting for trade tax purposes would also have to be possible. In the statement of justification, the crucial point, apart from the special issue mentioned above, was that the FG determined that foreign withholding tax and German trade tax constituted similar types of tax on income within the meaning of Article 2 of the DTA with Canada. This assessment is of far-reaching significance because the definition is normally based on crediting against a tax on income.

The text of the national legislation does not generally provide for any possibility of offsetting in the way that this is enshrined, for example, in the legislation relating to income tax and corporation tax. Nevertheless, in the case in question, use was made of the application of the DTA as superordinate legislation and - regardless of this, that according to German national legislation no offsetting is provided for - offsetting was carried out. Moreover, the FG concluded that crediting the withholding tax against German trade tax has to take place at the level of the trade tax assessment notice.

Outlook

The right to determine the extent to which the FG’s legal interpretation - that withholding tax, if it is covered in the DTA, may be credited against trade tax - will endure has been reserved for the next highest court, since the FG’s ruling is already pending before the Federal Fiscal Court. 

Recommendation: In similar cases, it is recommended to lodge an appeal against a tax assessment that is not compatible with this court ruling.